By SUNIL CHADDA
In the first three articles in this series, I highlighted some of the many asymmetries and inequalities that individuals experience as retail investors. In this, my fourth, article, I pause for breath to ask whether it really matters that you know your investment costs and then, armed with that information, keep them under control. And, if it does, why is it so important?
Firstly, some context. Since the global credit crunch in 2008, central banks have used Quantitative Easing (or QE) to try to keep money flowing and support economies. That big bust was avoided.
Much of this money, however, found its way into stock markets, commodities markets and property, with all asset classes having been recently or currently on highs. The use of QE has meant that we have all “borrowed” future returns and have consumed them since 2008.
With inflation at 0.9% p.a. in 2020, 6.2% p.a. in February 2022 and predicted to be 7.4% p.a. later this year, the situation might be about to get considerably worse as the possibility of stagflation looms on the horizon.Stagnant growth and high inflation are not a recipe for generating stable ongoing investment returns.
Controlling costs is more important now than ever
So, with returns now low and inflation rising, investment costs are probably at their highest level in history when expressed as a percentage of total return.
Investors cannot control returns, but they can control their investment costs — provided that they know what they are and where they are located.
Unsurprisingly, compounded savings in investment costs over the lifetime of your pension will be sizeable. Consider the following example based on a pension lasting 60 years, 40 in accumulation and 20 in decumulation:
Multiple layers of fees and charges
That’s great, but just how do you magically identify and then go on to save that 1-2% each and every year? Just where exactly do you start? Investment costs in financial products are layered, and you may well pay them at each “layer” or at a combination of “layers”.
For example, each of the following may be a good example of layered costs in our investments:
1. investment platform/ broker-level;
2. product level (i.e. ISA/SIPP);
3. fund level, and
4. instrument level.
These are the most common layers. Try identifying some of them. You’ll be surprised at how much money you’re paying.
Even I got stung by excessive costs
About two years ago, after looking carefully at what I was paying for a SIPP and everything involved in it, I decided to seek better “value” elsewhere. I ended up switching investment platform. From what I could tell (and I am an expert in investment fees and charges), I was paying a of 2.44% a year. But I just couldn’t source the cost information to understand exactly how much I was paying in total.
I now pay 0.45% a year and am confident that this figure is fairly close to what I think the true cost of everything to be. That is a saving of around 2% a year, and, in light of the figures quoted in the example above, I wished that I had understood this before!
How many of us are aware of how much we really do pay?
Lower costs lead to better outcomes
Clearly, if you can keep your costs down while obtaining what you believe to be “value”, then you should be looking at a better financial outcome. You will still have to get over the hurdle of covering your overall costs, that is the inflation rate — currently around 6.2% — plus your investment costs.
If knowing our investment costs is so important, then why is it so hard for us to find them and understand them?
So, remember that much-asked bigger question? Is retail unit-holder inequality limited to the differential in share class costs, asymmetries in fund documentation, flawed “Assessment of Value” Disclosures and asymmetries in financial knowledge? I think not.
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